When United Parcel Service, the logistics company, went public in 1999, top executives gave one overarching rationale for the wrenching change to its conservative, operations-focused corporate culture – large-scale acquisitions.
More than a decade later UPS is finally making its move, taking advantage of its greater scale, financial strength and access to capital markets with a €4.9bn offer for TNT Express, the recently spun-off Dutch package delivery company.
The bid comes as the leading express parcel groups are enjoying moderate if uneven growth amid the patchy economic recovery and have moved to tap into international trade flows and build out their global networks through a combination of capital investments and acquisitions.
In 2005, for example DHL of Germany took over the UK’s Exel in a deal worth about €5.9bn, but for the most part deals have been smaller in size as logistics companies have filled in specific service and geographical gaps.
For UPS the move has been a long time coming. Despite having a market capitalisation of about $74bn and buying about 30 companies since 1999, the largest deal it has struck to date was for Overnite, a trucking company, for about $1.3bn in 2005.
In part the step by step approach of UPS reflects a deep strand of circumspection that runs through the corporate culture of the Atlanta-based business. In its entire 105 year history the company has had just 10 chief executives.
Caution is warranted. Large scale deals in the package delivery sector have a mixed record. Deutsche Post DHL’s acquisition of US based Airborne Express in 2003 went poorly. IT problems led to late shipments, billing errors and customer defections. DHL eventually pulled back from the US.
At the same time, until the spinoff last year, the combination of TNT’s express business and Dutch mail business was a significant stumbling block, tying an attractive parcel delivery business to a shrinking national mail service.
TNT has long been seen as the most likely target for the company. “UPS went public in 1999 with one deal in mind,” says one person familiar with the company’s thinking. “That was TNT’s express business.”
In the first place TNT Express has a substantial presence in Europe that compliments, and in some cases overlaps, UPS’s network. A deal would make UPS the biggest express carrier in Europe and could generate about $450m in synergies.
Doug Caldwell, with AFMS Logistics Management Group, says that the company has a strong relationship with European multinationals, a valuable long haul road network and an outsourced operating model that gives it a very flexible cost base.
By the numbers, TNT boasts a presence in 62 countries, including 16 road hubs in Europe, employs 83,000 people and has a ﬂeet of more than 30,000 road vehicles and about 60 aircraft. It is the smallest of the big four global package delivery companies.
Another attraction for UPS is that TNT has a sizeable, albeit underperforming, presence in Brazil and China. UPS has ambitions in Latin America, has moved to develop a domestic Chinese footprint and has a reputation for buying struggling companies and fixing them up.
Whether UPS will succeed in its bid is another matter. While some leading shareholders are backing the proposals, last week TNT’s board rejected the offer after careful consideration, although discussions are ongoing.
Another wild card is FedEx. While UPS has a sizeable ground operation in Europe, FedEx has long been considered sub-scale in the region after closing its Brussels hub in the early 1990s following a long and unsuccessful battle to reach profitability.
In public FedEx has insisted that its position, focused on moving high-value packages between Europe and Asia and Europe and the US, is solid, but analysts argue FedEx has an even more powerful incentive to purchase TNT than UPS and predict a bidding war could break out.
Indeed, fending off a move by FedEx is another powerful reason for UPS to act. UPS generates about 14 per cent of its revenues from intra-European express packages while FedEx produces only about 2 per cent of its sales from that segment.
In a tussle, UPS’s scale could make the difference. The company’s market capitalisation is more than double that of FedEx and it has substantial free cash flows, while its rival is committed to a heavy round of capital spending on new aircraft and might find it more difficult to pay for a deal.
At the very least investors expect UPS to have to pay more to clinch a deal. Since the offer was revealed, TNT’s share price has jumped more than 50 per cent and is now well above UPS’s €9 a share offer price.
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